Fed's Jefferson and Harker suggest central bank will pause in June

Federal Reserve Governor Philip Jefferson and Philadelphia Federal Reserve President Patrick Harker suggested Wednesday that the central bank could pause rate hikes at its next policy meeting.

Jefferson, President Biden's nominee to be vice chair of the Fed's Board of Governors, noted that such a decision wouldn't necessarily mean the Fed was done hiking rates.

“A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle,” Jefferson said in a speech at a conference in Washington. “Skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming.”

Harker, speaking in Philadelphia, said “I am in a camp increasingly coming into this meeting of thinking that we really should skip, not pause,” adding that “we've got to get to a point where we believe policy is restrictive and I think we're close if not at that point right now.

Harker said he wanted to look at two key pieces of data: the May jobs report due out Friday and another read on inflation via the consumer price index on the first day of the Fed's next policy meeting, June 13.

“I think we have to be ready that we might have to do more and I'm fully aware we have to do that and willing to do that, but I want to give it a little bit of time.”

Markets predicting a hike

The comments from the two Fed officials come as the markets raise their expectations for a rate hike in June following the release of new labor market data showing that job openings in April rose to their highest level since January.

The latest Job Opening and Labor Turnover Survey, or JOLTs report, released Wednesday revealed 10.1 million job openings at the end of April, an increase from the 9.8 million in job openings reported in March. Economists surveyed by Bloomberg had expected 9.4 million openings in April.

Market pricing for a rate hike in June shot up after the Wednesday's JOLTS report. Entering the day, markets had priced in a less than 60% chance of a hike in June. About 15 minutes after the report, markets had priced in a 71% chance of a hike, according to the CME FedWatch Tool.

After the comments Wednesday from Jefferson and Harker, markets predicted the chance of a pause was now 64%.

A divided Fed

Federal Reserve officials were divided at their last policy meeting on what the central bank’s next move should be, according to minutes released by the central bank. Several officials were leaning toward a pause and many wanted to keep options open given uncertainty about the outlook.

Fed Chair Jerome Powell said earlier this month he is still keeping options open. St. Louis Fed President Jim Bullard has said he is looking for two more rate hikes, while Dallas Fed President Lorie Logan has said a pause is not in order right now.

Boston Fed President Susan Collins has suggested the Fed may be at or near a pause, but reserved the option to make decisions meeting by meeting given the data at the time.

An uncertainty that 'complicates economic forecasts'

Jefferson said while his base case for his economic outlook isn’t a recession, he expects spending and economic growth to remain quite slow the rest of the year because of low consumer sentiment, heightened uncertainty and a decline in household savings amassed during the onset of the pandemic.

He also noted that higher interest rates and lower earnings could test the ability of businesses to service debt.

Jefferson said he thinks higher rates could also further exacerbate stress for banks that are highly exposed to longer-duration assets and have a high ratio of uninsured deposits.

He also says it’s too early to tell how much banks will pull back on lending following the tumult in the industry during the first part of the year.

“While it is reasonable to expect that the recent banking stress events will lead banks to tighten credit standards further, the amount of tightening and the magnitude of the effect such tightening might have on the US economy is not yet clear, and this uncertainty complicates economic forecasts,” said Jefferson.

Separately, Jefferson said federal banking agencies are working on a proposal for new bank capital requirements and that the proposal should be issued for public comment soon.

The Fed governor also noted that the central bank is considering ways to enhance the ability of stress tests to capture a wider range of risks and identify vulnerabilities at the largest banks.

“By increasing standardization, these reforms aim to increase transparency and public confidence in risk-weighted assets while also reducing complexity,” he said.

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